When Refinancing Can Be A Bad Decision
There is something about refinancing which can be like a hype, when everybody is speaking about refinancing many people and homeowners might think that refinancing is like a magic solution to all their troubles and financial pit holes. But that is not the case, refinancing a mortgage is a smart move only if the conditions are right. In this review you could read when is refinancing a very bad idea.
There are several basic refinancing mistakes some people do because they hurry to refinance their mortgage, and never stop for a second and figure out, is this the best thing for them. The way to see if refinancing is a bad idea is to do some simple calculations, which in the end you will have a numeric figure, (in US Dollars) which will be either worth the refinancing effort or not worth the refinancing process.
Even if refinancing your mortgage may be a bad idea, there are other ways to benefit from the current low rates.
Refinancing Is Bad Idea If You Have An Old Mortgage
The first thing you should check before deciding to refinance your mortgage is how long have you been paying for the current mortgage. There is a financial term called amortization. Which is the change in the payments of a loan throughout a whole cycle from beginning of day 1 till the last payment 30 years a head.
The monthly payments might be of the same amount $1000 at the first month and at the last month, but the thousand dollars are divided differently to principle and interest. At the beginning of the mortgage, 90% of the return payments are for paying back the the interest rate, and a small portion is to cut some of the principle down.
Usually after half of the mortgage period has passed, you have paid most of the interest already. And at the second half most of the payments go to the principle and less to the interest rate. So refinancing will be a bad idea because getting lower rates will not save you much.
Refinancing Is A Bad Idea If Your Score Is Now Low
The interest rates for refinancing are calculated by the lenders just like for a first time mortgage. The lender will check your financial abilities, the same Front-End & Back-End debt to income ratio will be evaluated, the lenders will run a thorough check to your FICO score credit report.
If your FICO score is now lower than it was when you first bought the house, than a national low rates will not be relevant for you. The lenders will see that your score is low (or lower than it was) and the rate you will get for refinancing will be set accordingly.
So before you run to refinance do your refinancing homework, check the minimum refinancing credit score needed. If your FICO score is lower, but you still want to save thousands by refinancing, the appropriate move would be to raise your FICO score by some points and get the best refinancing rates you can. Rebuilding the FICO score is not ‘rocket science’, you can learn how to do it through this guide.
Refinancing Is A Bad Idea For Paying Credit Card Debt
Some people who have a lot of credit card debts are tempted by the low mortgage rates to try and refinance the home and to roll the revolving credit debts into the new refinanced mortgage. The main problem is that while dealing with collectors and collection companies is certainly not pleasant, having your home taken away by foreclosure is even worse.
If you have problem to manage your expenses, it is worth to get some home buyers education or family economic course, rather than adding debts to the mortgage. Being behind on the mortgage may end up loosing the house!
Refinancing HELOC loan May Be a Bad Idea
Refinancing a HELOC (home equity line of credit) means that your loan is given to you in exchange for the equity you have in your home. If you have a home equity loan which is more than 80% of your home value, your lenders know they are at great risk if the home market value declines. Since lenders are at risk they will give a higher interest rate, which may be unworthy for refinancing. Another thing to take in mind is the private insurance rates, they will be adding some more payments to the overall loan payments.
You might find out that refinancing a HELOC is a bad idea.
Refinancing With Prepayment Penalty Is a Bad Idea
Some borrowers have a pre-payment penalty on their mortgage. This means that the lender placed a penalty for any pre-payment, even if it is refinancing. Lenders do that so they can plan ahead about their funds and nostro investments, and have a steady forecast for their income. Part of the refinancing homework is to see if your current mortgage has a pre-payment penalty, otherwise refinancing will be a bad idea.
If you plan to refinance with a different lender do the calculation how much you will be saving by refinancing and include the prepayment penalty inside. If you plan to refinance with the same lender, than you have two options. One is to negotiate the prepayment penalty, and the second is to request it to be waived into the second mortgage.
Having a great credit score may help you negotiating every fee and cost! Since lenders are at financial risks themselves and adding high credit customers is part of their goals. If your credit is below 650 don’t wait and GET this guide and learn if you can pass the 700 points.
If You’re Planning To Move? Refinancing Is A Bad Idea!
Refinancing has it’s costs. One basic thing you should consider before you rush to refinance your mortgage, is how many month (years) are you planning to stay at your current home. If you are a student or unmarried, and your life is not 100% settled down, than you need to calculate the refinancing ‘break even period’. The break-even period is the exact amount of month (years) you will need to stay at the current home, until you benefit from th lower mortgage rates you achieved by refinancing.
If your closing costs are $2,400 and by refinancing you managed to lower the monthly $1,900 payments to $1,800 each month. Then the ‘break even point’ will be to divide the $2,400 by the $100 savings. This will be 24. This means that the real saving from refinancing will begin after 24 month (2 years). If you plan to move in the next year than refinancing was actually a bad idea since it didn’t save you anything.
So What Is The Next Step?
If you will do nothing.. don’t expect anything to happen. You must bump your credit score up! It will give you better leverage when facing the lenders, and better negotiation position when applying for any financial need.
Lets not forget you are probably paying $500-$1000 extra per year in higher interest rates, and credit payments.
If your score is below 700, you might want to clean it yourself – get this ‘Credit Repair University’ which will save you money and time.
Yes, you might need to invest a small sum to get a grip of things.. But if you think education is expensive.. try ignorance..
You are probably paying thousands of dollars per year in fees and interests to credit companies which could be going straight to your pocket. Don’t be cheap when it comes to financial education.. Ignorance costs more.